Urban equity, informality, and financial inclusion

December 2014 — Urban equity, financial inclusion, and the alleviation or elimination of urban poverty all demand that the gaps between formal and informal communities and economies be bridged. To address these needs, initiatives have sprung up in cities throughout the developing world that aim to put financial power and momentum into the hands of poor and disenfranchised residents of informal urban communities, while strengthening the power of cities to put inclusive principles into practice. Some target financial literacy and the ability to navigate the formal economy; some use micro-finance loans and other financial instruments to empower those outside the conventional definition of creditworthiness; others use mobile money and other technologies to bridge access gaps.

For the month of December, URB.im will explore initiatives in all of these areas in cities and communities across the Global South. Follow the conversation and contribute in the comments below.

Jozi@Work: Co-production between citizen and city

Johannesburg, 24 December 2014 — There is a strong and enduring correlation in Johannesburg between un/under-employment and a wide range of sobering poverty indicators. Opening up opportunities for the former is therefore crucial to alleviating the latter. In a context of increasing returns to larger firms, narrow labor absorption into larger industries, low structural skills levels, and shrinking micro sector employment, the City of Johannesburg has introduced an innovative job support and creation initiative called Jozi@Work, designed to incorporate citizens into the service delivery process of the state. See more.

Jozi@Work: Co-production between Citizen and City

Tariq Toffa, Johannesburg Community Manager

Announced in 2013 by the mayor of Johannesburg in the State of the City address, at the center of the new 'Jozi@Work' concept and initiative is empowerment and co-production, whereby citizens become active participants in the service delivery process of the state rather than passive recipients only, and in so doing can begin to shape the future of their own outcomes. The concept has already been used in similar forms in many countries.

Specifically, by the close of the current mayoral term in 2016, Jozi@Work plans to allocate over R1 billion (US$100 million) or seven percent of the City's total budget in City contracting (made up of ten percent of all City contracted services, ten percent of repairs and maintenance, and five percent of all capital spend) to an estimated 1,750 new and existing community-level co-operatives and enterprises. This, it claims, will support 12,500 livelihoods over the next year and create 40,000 new jobs by 2016, and thereby make a significant change in poverty, inequality, and unemployment realities in the city. Another aspect in which it also hopes to effect change is in maintaining and improving service standards and quality across often sharply contrasting neighborhoods and communities.

The Jozi@Work initiative arises in the context of Johannesburg's strong and enduring correlation between un/under-employment (one quarter of all working age residents, or over 800,000 people, failed to secure a livelihood in the city in 2011) and the wider range of sobering poverty indicators, such as below-average income, poor health outcomes and mortality rates, lack of access to education, and poor living environment standards. Such indicators also indicate deeper, cyclical social realities, since an over two-thirds majority of those living in conditions of poverty amongst the city's most deprived communities are youth, with up to half of these living in informal circumstances.

Although other City plans, such as the 2040 Growth and Development Strategy and the wider 2030 National Development Plan, address aspects of this unemployment-poverty correlation in advocating that economic inclusion in the short to medium term must be spearheaded by small and medium sized enterprises, 2005-2013 data indicates that the small, very small, and micro sectors are shrinking across the country in terms of their total employment contribution. This also reflects wider trends: concentration of value chains, increasing returns to business models that privilege larger firms across both the public and private sectors, narrowing of labor absorption into larger industries, and the structural skills gap which is a key constraint in increasing labor force participation in the city and the country generally.

Jozi@Work, thus, is an innovative and commendable initiative by the City; but beginning just recently, at the time of writing it still remains largely a project in the making. If Jozi@Work will indeed bring small, new and existing community-level co-operatives and enterprises to City projects, it stands to reason that a sister initiative could also be formalized and launched that does the reverse, bringing the City to community level initiatives (perhaps 'Work@Jozi'?); and together establishing a basket of focused support for creating and growing small and micro enterprises, both in real terms and in the public imagination.

Despite the fleetingness and apparent inconsequence of terms in political office, with benchmarks typically set within these terms rather than in real terms, launched by the Johannesburg's mayor Jozi@Work is further indication that citizen-focused, city-shaping projects — especially those that would make a change to the status quo — need to be supported by political will and ethical imagination. The 'polis', after all, is politics. Close.

A misguided fiscal policy's unintended effect

Tehran, 23 December 2014 — Since about a decade after Iran's 1979 revolution, housing has been largely unaffordable for the urban poor. "Mehr housing" is a government-sponsored solution aiming to reduce the effects of bad housing among poor urban households. But just five years after starting the project, misguided fiscal policies linked to this project have worsened the housing problem rather than improving it. See more.

A misguided fiscal policy's unintended effect

Maryam Amiri, Tehran Community Manager

The issue of housing in Iran has always been a very problematic debate. In the first decade after the 1979 revolution, the government led various projects to address the issue, almost all of which were successful. But after 1990, the Government went through a period of economic structural adjustment and surrendered the housing sector to market forces. The condition of the real estate sector has worsened since then. Land and housing prices have increased throughout the years, and now obtaining a house is hardly affordable for poor urban households, which are increasing in number each year. As another result, the number of informal settlements around mega cities, especially Tehran, has been growing from five percent of total houses in 1979 to 30 percent in 2013.

Considering this problem and its inevitable consequences, the government decided to start an immense project in 2010, the Mehr housing project. The goal of the project was to ease the housing problem for low-income populations by building 2.2 million housing units in four years, based on long-term lease of land. Under this scheme, real-estate developers are offered free land in return for building cheap residential units for first-time buyers on 99-year lease contracts. Although at the beginning applicants weren't supposed to pay significant amounts (only about 20 percent of the construction costs), their share gradually increased. This can be explained by an explosive inflation rate, which was caused partly by the project itself.

From 2009 to 2013 the banking sector, particularly Bank Maskan (Housing Bank), gave loans to contractors of the Mehr housing project up to USD $38 billion. These loans were provided by the Central Bank through credit lines for the banking sector from its money supply resources. As a result, liquidity increased rapidly in Iran's economy, and it fueled the inflation rate to reach a new record of 42 percent in 2013.

In the housing sector, too, the inflation rate raised dramatically. As a result, the loans gradually lost their value, covering from 60 percent of the home's value in the beginning to less than 12 percent in 2013. The project seems not to have reached any of its goals. These results dissuaded the new government (elected in 2013) from carrying on with the project, in order to control the inflation rate. Iran's Minister of Urban Development said in early 2013 that the Mehr housing project would be discontinued, but "we will finish incomplete houses." The affordable housing issue is therefore still a problem, as low-income populations are unable to afford the housing prices.

It is now clear that these kinds of mega projects should be financed in a different way. The Central Bank is said to be working on providing mortgage loans through the banking sector. These loans, which will be paid directly to the buyers, are supposed to cover the main part of home value, and it will be accompanied by an expansion in secondary markets in this regard. It is critical that these new models not be inflationary in nature, in order not to repeat the same mistake. Close.

Empowering SMEs through financial education

Mexico City, 22 December 2014 — Small and medium formal and informal businesses in Mexico City create thousands of new jobs every year. However, 90 percent of informal businesses fail within the first two years, mainly due to financial exclusion. Faced with this situation, BBVA Bancomer launched in 2011 a strategy to empower these business leaders with the goal of giving them inclusive access to financial services. See more.

Empowering SMEs through financial education

María Fernanda Carvallo, Mexico City Community Manager

According to the OECD, "During the last decade, the majority of economies in Latin America and the Caribbean have shown sustained growth, which has resulted in an increase in their middle classes. In spite of these advances, levels of poverty and inequality continue to be high, and financial exclusion continues to affect both the urban and rural populations, which could hamper the future economic and social development of the region."

Financial exclusion affects business owners as well as Small and Medium Enterprises (SMEs). With regard to SMEs in the informal sector, the negative impact is greater, as entrepreneurs normally have difficulty finding financing for their business, credit, social security for their employees, access to training from partner institutions, and other benefits.

In this context, one of the biggest challenges different bodies of the government and financial institutions in Mexico City face is ensuring financial inclusion of informal SMEs. Why is it important to include them financially? It is known that SMEs are the economic engine of the country, generating 52 percent of Gross Domestic Product and 72 percent of employment. Ten percent of economic activity in the country is from informal SMEs, meaning restaurants, service-based companies, or businesses of some other sort that are not registered before competent authorities due to lack of knowledge or incentives.

At the same time, over 90 percent of SMEs do not survive the first few years. Reasons for this include lack of access to credit, poor business culture, lack of knowledge of the market, and insufficient government support.

Realizing this problem, the Federal District Government and financial institutions look to build platforms to bring the benefits of formality to these SMEs. One of the first steps in encouraging financial inclusion is through education, intended to teach the benefits of moving toward formality.

One of the key players in the finance sector in Mexico that overcame the challenge of financial inclusion for formal and informal companies is the BBVA Bancomer group. The group advocates for a free and accessible fiscal education model for all those looking to improve their capacities using financial instruments.

Their financial education project Go Ahead with Your Future aims to strengthen the knowledge of formal and informal SMEs and inform them about topics like credit resources, cash flow, and credit coverage. SME workshops can be in person at the Interactive Economy Museum or online via the "Go Ahead with Your Future" website, which enables users to have tutors, or participate in chats or forums where they can find solutions to their problems.

BBVA Bancomer started these workshops in 2011. Between 2013 and 2014 they had benefited more than 3,000 people in Mexico City and 70,000 at a national level. While this program alone does not solve the issue of financial exclusion for informal SMEs in Mexico City, it is a good start to invite informal businesses within the Federal District to move toward formality to be able to grow, provide employee benefits, and expand their services. Close.

Inclusive finance through financial education

Surabaya, 19 December 2014 — A survey done by the Bank of Indonesia showed that only 20 percent of Indonesians have access to formal financial institutions. This number is very low compared to neighboring countries such as Thailand and Malaysia (77 percent and 65 percent respectively). The Bank of Indonesia has therefore implemented an inclusive finance strategy through its financial inclusion pillar, which targets poor communities and youth to familiarize with banking services. See more.

Inclusive finance through financial education

Widya Anggraini, Surabaya Community Manager

Increasing financial access for low-income communities is a major concern for the government because financial access for these populations is currently very limited. According to the Bank of Indonesia's Household Balance Survey 2013, only 20 percent of households have access to formal financial institutions. This low level of access is caused by several factors such as low incomes, complicated banking operations, limited education about finance and banking, and expensive bank administrative fees. This situation gave rise to the inclusive finance strategy implemented by the Bank of Indonesia in order to boost the economic activity of communities that have poor access to banking services. This program is expected to promote equal distribution of income and poverty alleviation. The strategy is adopted nationally, with the goals of removing any form of hindrance in accessing and utilizing financial service. One of the pillars of inclusive finance is providing financial education to the community through programs implemented in several big cities, including Surabaya.

One of the largest financial education programs is the AYO KE BANK (Let's Go to the Bank) campaign and the launching of the TabunganKu (MySavings) product. This program opens opportunities for communities that have been unreachable by formal banking sectors so that they can access banking services, including basic products such as savings accounts, bank loans, transfers, and affordable insurance. In this scheme, those who are interested in opening an account are not charged monthly fees, initial fees, or low-deposit fees. Hence, it is expected that more members of these communities will start saving and make use of other financial services.

The financial education movement through the "Let's Go to the Bank" campaign also provides Mobil Edukasi (the Education Car), a website, and brochures. The Mobil Edukasi, filled with various books and banking resources, routinely visits schools, markets, residential areas, and office buildings. The website and brochures are used to introduce banking services such as loans, filing complaints, and ways to save and invest. This program also aims to introduce banking to the youth generation through integration into the elementary school and middle school curricula. Introduction to the function of a bank from an early age is also done by bringing students to the bank so that they can visualize and learn directly.

Inclusive finance through financial education by the Bank of Indonesia is a blueprint that started in 2008 and is implemented today through a series of programs. The application of this strategy was not easy, and many other large banks such as BRI, CIMB, and BNI have established partnerships throughout its progress. However, the Financial Literacy Survey still shows many weaknesses, whereby financial understanding is still very much affected by gender, age, education level, and geographic access to banks. Hence, a strong commitment from various sectors is needed to continually support financial education, especially for the youth generation and lower-income communities, as well as coordination and collaboration in order to sustain the inclusive finance campaign. Close.

Expanding skills-training access through microloans

Mumbai, 18 December 2014 — India has the largest youth population in the world — a hundred million more young people than China. To harness the energy and potential of this up-and-coming workforce, India has invested heavily in skills training. However, in order to truly make these trainings available to a highly socio-economically diverse population, better access to educational-style loans for skills training is essential. See more.

Expanding skills-training access through microloans

Carlin Carr, Mumbai Community Manager

India's massive youth population has the potential to be an enormous asset in the coming years. It was recently announced that India has 365 million 10-24 year olds — the largest demographic in the world, even outpacing China by nearly 100 million — and if given appropriate access to opportunities, education, and training, this up-and-coming workforce could set the country on a trajectory toward epic growth. In order to fulfill this goal, India has invested heavily in the National Skills Development Corporation (NSDC) to expand vocational training opportunities. The focus on skills training provides a variety of new opportunities for a highly socio-economically diverse youth population, but one of the keys to making the training programs truly accessible is to better link financial access to vocational training — an area more and more microfinance institutions are exploring.

EduBridge, based in Mumbai, is one of these organizations working to close the skills gap. The training center helps underprivileged youth develop the skills to work with corporate India in the future. It has received accolades for being one of the NSDC's most successful investees. While the tuition fees are usually not outrageous for programs such as these, they can still be out of reach for many youths. The Times of India reports that on average a three-month program costs between INR 8,000 and INR 30,000 (USD $130-$480). However, as the push to improve the quality of training courses continues, associated costs are likely to go up, further expanding the gap in ability to pay.

"As students will be required to pay more, access to loans will become crucial. In fact, allowing trainers to charge the market rate will also pull big trainers to start skill development schools," said Nimish Mehta, a researcher at Dr Reddy's Cell for Employability and Skill Development at the Indian School of Business, in the Times of India article.

Springboard is one of a growing group of financial services institutions linking up loan access to skills training. The company has a four-step process to evaluate the trainee's potential as a loan recipient. Loan officers look at the cost, duration, and timing of the vocational program as well as the recipient's potential to repay. The idea is to base decision-making on the potential of the youth, evaluating the course of instruction and work prospects, rather than on their current circumstances. Once granted, loans range from INR 5,000 to INR 50,000, similar to costs for courses.

The NSDC has also seen this need to link youth with appropriate lending opportunities, and has recently tied up with the Indian School of Business to extend credit to needy students. The NSDC has high hopes for the year to come. It has pledged to skill 3.3 million youth in just this one fiscal year. The fast pace and ambitious goals are a product of the government's overall plan to upgrade the country to a trained workforce of 150 million by 2022. The plan is ambitious, but doable — but only if all youth have equal access to the programs that could not only transform their individual futures but also that of the entire country. Close.

Cali, 17 December 2014 — Poor women are disproportionately affected by financial exclusion. By fighting this issue, it is possible to alleviate both poverty and gender inequality. In 1980, a small group of women in Cali created a microfinance foundation that now has grown into a bank, but still retains its function as a center for assistance of women who want to become entrepreneurs. See more.

Jorge Bela, Cali Community Manager

Although financial exclusion is a widespread problem for all people living in poverty, it is particularly severe for women. Poor women face larger barriers to obtaining any kind of credit in the traditional banking system. Improving financial inclusion for women therefore accomplishes two important goals at once: fighting poverty and fighting gender inequality. Two of the largest microfinance institutions in Colombia, Bancamia and Banco WWB, can trace their origins to NGOs led by women focusing on women's financial difficulties.

Banco WWB started its operations as a foundation in 1980. Sixty-nine women created it, based in Cali. Its first micro credit was granted to a woman who wanted to open a bike shop, which is still operating today. At first the organization obtained financial support from private organizations, such as the Fundación Carvajal, and later from international NGOs. They also benefited from technical advice given by the Inter American Development Bank. In 2011 the organization created the formal bank, whose clients are mostly micro business owners, 60 percent of them women. The bank currently has 260,000 million COP (about 160 million US$) in deposits, and 33,000 million COP (about 15 million US$) in 140,000 saving accounts.

The WWB Foundation is still in existence as a completely separate legal form from the bank, although it is its largest stockholder. The Foundation is still very active in providing support for female entrepreneurs. Its work is centered mostly in the areas of training, education and research, as well as conferences and cultural activities.

In previous articles regarding micro financing, we have already discussed the importance of financial education in preventing the risks inherent to this kind of credit. WWB has created the Centro de Liderazgo de la Mujer (roughly translated as Center for Woman and leadership). The Centro offers short courses in financial education, with a strong practical orientation. Topics are not limited to financial questions, they also cover issues like leadership, information systems, entrepreneurship and management. Courses are offered both online and in person. These activities are open to all interested women, not just to the bank's customers.

In addition, the Center has a daily radio program: Mujeres que Inspiran Mujeres (Women inspiring Women). It includes a Q&A section in which women can call in with questions regarding their business. The program lasts for one hour and can be heard in 27 municipalities in the Cauca region, and is also broadcast online.

The Centro de Investigación para las Microfinanzas (Microfinancing Research Center) was also created by the Foundation. It's research focuses on the impact of microcredits in the community. The studies can serve as a stimulus for future programs or as early warnings for potential troubles in the sector. Finally, the Foundation has also created a webpage where women entrepreneurs can showcase their business and products. Although it does not allow for online shopping, it includes all the necessary contact information. Close.

Linking social protection for financial equity in Tanzania

Dar es Salaam, 16 December 2014 — Financial equity is not simply access. Financial equity means that individuals are presented with a security net enabling the protection of financial assets through family, structural, or environmental events. Focusing on national programmes in Dar es Salaam, which provide financial safety as a solution, this article argues that financial equity requires reducing risk for assets. See more.

Linking social protection for financial equity in Tanzania

Gemma Todd, Dar es Salaam Community Manager

Action towards financial equity has often focused on access — the poor lack access to credit and finance, and programmes are required to fill this gap. Dar es Salaam has seen a growth in micro-finance schemes. For example SACCOS, a savings and credit cooperative union, works to provide a means for poverty alleviation by providing access to financial goods and services. Across Tanzania it is estimated that there are around 1,507 SACCOS registered — urban and rural. Although SACCOS provides access as a means for financial equity, it is debatable how much and how sustainable the savings is, as the amount that can be saved, borrowed, and lent depends on the association's rules, cooperation, and unity. Looking at financial access within the "livelihoods framework," a framework developed by Carole Rakodi, among others, highlights how people are embedded within structures but also have opportunities whereby they can strategically act for poverty reduction. People are identified to have certain assets, which influence their vulnerability, capacity to cope, and to remain resilient. Therefore, if people are provided access to credit and then experience life changes, they may be pushed back to the same position, or a worse one, unless they have not been provided with the tools to ensure protection. Equity therefore needs to focus on evaluating future risks and providing a safety net. This article's focus now turns to new national policies and programmes within Dar es Salaam that focus on social protection.

The Tanzania Social Action Fund (TASAF) is a national intervention providing a safety net to the poor, while also providing sustainable income growth. It provides finances for Tanzania's 13.5 million people living below the poverty line. Its Productive Social Safety Net (PSSN), in collaboration with the World Bank, involves the poor contributing into three "funds," which enable them to afford basic necessities — food, health, and education for their children. For example, one of the funds is a Community Health Fund, whereby the individual or family pays a determined regular fee, which contributes to the health care of the household in the event it is required. The household is entered into a savings scheme, which protects their assets for when emergencies arise. PSSN is an unconditional transfer system that has had a positive impact on 280,000 poor beneficiaries. These households are now able to live with the security and protection of assets.

Additionally, changes are occurring within the SACCOS system, based on the importance of urban residents recognising and planning for risk. The World Council of Credit Unions is now working with the Bank of Tanzania to create a centralised regulatory system for SACCOS to use. The system recognises the benefits of access, but introduces a means to regulate savings and loan disbursement. It is also training workers in "risk-based supervision" and establishing early warning systems. Workers advise customers on financial risks and on how to detect risks early.

As micro-finance in Tanzania continues to evolve, regulation is key for financial equity. Nationally, the focus needs to be on reducing risk, and on providing financial protection. The solution is not necessarily providing cash, but providing a opportunity to protect assets, and also becoming incorporated in the asset consumption system. For example, one micro-finance organization in Dar es Salaam is now working with the urban poor to provide access to housing through housing financing schemes (such as WAT-SACCOS). The urban poor in Dar es Salaam are increasingly being provided financial access for financial equity; however, the government and institutions are intervening to ensure protection methods. With environmental flooding common in the city, and additional hazards faced daily, such as death, morbidity, and unemployment, a focus on savings is key. Close.

Bridging the gap between classes: bKash Wallet

Dhaka, 15 December 2014 — Mobile banking has found new avenues for bridging social gaps in banking. bKash Limited gives citizens a cheap and convenient way to save, make money transfers and purchase services. People in Dhaka and all over Bangladesh are benefiting from increasingly inclusive financial services. See more.

Bridging the gap between classes: bKash Wallet

Raiya Kishwar Ashraf, Dhaka Community Manager

Access to financial services remains a middle and upper class luxury for many communities in Dhaka. Those without stable or substantial incomes often rely on individual guarantors or "home banks" to save the cash they earn. The vacuum of cheap banking services for informal settlers and migrant communities in Dhaka was recently filled by bKash Limited. A subsidiary of Brac Bank, bKash promises fast, affordable and secure banking nationwide. Accessible free of cost to everyone, bKash offers money transfer, international remittance sharing, and savings accounts services.

The bKash wallet allows a minimum balance of Tk. 1000 and has no maximum limits. Subscribers fill out a form at local bKash stands and provide their mobile number that is used for accessing the bKash wallet or other services, and sign with a thumb print. Individuals, shop-owners and businesses can gain agent status by simply opening an account of their own through the mobile network they use. Patrons then pay agents with the cash they wish to transfer to their wallet. This amount is immediately added to their account and is accessible through ATMs, with bKash agents nationwide, and may be used to pay for services offered by bKash partners. Phone credit refills and money transfers can be made by dialing the relevant codes along with their mobile numbers.

"Customers come to me when they want to send money somewhere. The receiving person visits another agent where they are. The receiver shares their agent's phone number, which I use to record and transfer money to their wallet. I take the money from the customer and a small transaction fee if they transfer a large amount. The process is automatic and has no delay. It is complete in less than five minutes", explains a shop-owner and bKash agent in the city's Palashi bazaar area.

The straightforward structure of their service ensures individuals, irrespective of age, employment or level of education, can navigate the system without middlemen or third party participation. BKash wallets allow patrons to earn up to four percent interest on their savings on a bi-annual basis.

A key reason why the service gained immediate acceptance and efficiency was due its reliance on existing mobile technology and community links. Tea-shops and small vendors in cities sell mobile recharge cards, offer cell phone rentals and pay-per-call services for people who do not own phones. They are also frequently entrusted with monthly savings and incomes by urban domestic workers, day-labor, cleaners and people engaged in similar low-paying work. These populations' lifestyles are heavily based on migrating where their work takes them and so they are often wary of opening savings accounts with NGOs or taking microcredit loans. BKash thus offers a convenient alternative to suit the needs of previously financially marginalized communities. In addition, the service is being adapted to pay health workers in many parts of the city. The trends suggest that many developments may follow based on the service, thus improved financial inclusion is expected in Dhaka. Close.

Multiple financial solutions for multidimensional poverty

Ho Chi Minh City, 12 December 2014 — In 2013, Vietnam considered changing its metrics and policies for poverty reduction from a one-dimensional approach to a multidimensional approach, and Ho Chi Minh City was chosen to experiment with this new approach. Besides drawing a clearer picture of urban poverty for HCMC, the multidimensional poverty index has become a guidebook for the city's multiple financial organizations. See more.

Multiple financial solutions for multidimensional poverty

Tam Nguyen, Ho Chi Minh City Community Manager

In August 2013, Mr. Vũ Văn Ninh, the Deputy Prime Minister and Chairperson of the National Information on Sustainable Poverty Reduction, instructed the Ministry of Labour - Invalids and Social Affairs to propose a change in methodology from a one-dimensional to a multidimensional poverty approach. Consequently, Ho Chi Minh City was chosen at the end of 2013 to experiment with these multidimensional poverty metrics and solutions. The dimensions measured cover issues that range from education to health, housing, property ownership, and accessibility of services. In contrast to the concern that the city might have to develop brand new solutions for the new metrics, the multidimensional approach has already existed in HCMC, but was only waiting to be realized and redefined.

There is variety

To support the poor, HCMC already has different micro-finance funds (some new, some ten years old) serving different objectives:

for loan repayment and livelihood improvement: the governmental funds include the National Fund for Hunger Elimination and Poverty Reduction and the Social Policies Bank

for small start-up businesses: the Capital Aid Fund for Women in Economic Development

for education: the Education Promotion Fund

for vocational training: the Capital Aid Fund for Employment of the Poor

According to the 2009-2013 survey of the Mekong Development Research Institute (MDRI), 51 percent of the poor in HCMC had received approval from one of the different micro-finance funds, and many of them felt very positive about the simple procedures and quick results of these organizations. "Previously I was funded 5 million (USD $234), and was able to repay after one year. At the end of 2011, my daughter-in-law wanted to open a small grocery stall at home. I went to the office and was instructed by the staff of the Social Policies Bank. The procedures were really simple," said one participant in a group interview of the MDRI survey.

Cohesion is needed

On the more negative side, these various funds have been working toward only one target: the poverty line; and only one homogeneous group of customers: the poor. They have been pouring all the resources in without finely segmenting their specific customers. This issue has led to stories such as the one told in the MDRI group interview: "My daughter had only finished the 2nd grade. Our family wants her to go to vocational training, but the funds require at least a secondary school diploma. How can she go?" The family was not eligible for the vocational training funds, but could have been the right customer for the education fund. However, the education fund did not communicate its availability as well as the importance of literacy education before vocational education to its correct target, because of their unspecified metrics and ineffective methodology.

Now with the MPI being developed, each poor community will soon be depicted more precisely with their most relevant poverty dimensions, as roughly illustrated in the figure. The various micro-finance organizations, then, should be able to specifically answer the question, "Who needs what?" Subsequently, the funds' staff can inform poor households with small children that they can borrow student loans and not force their children skip school, or households with unemployed adults that they can borrow loans for vocational training before trying for start-up loans. Thus, these funds can add better awareness and accessibility to their existing availability. Close.

Microfinance and architecture for the poor?

Cape Town, 11 December 2014 — Set against the controversies of the global microfinance industry, the South African context of high household debt, rising cost of living, and high unemployment suggests that South Africans need better ways to build and maximize savings more than they need a global microfinance model leading them to incur further debt. As microfinance in South Africa looks set to continue its growth, it must consider how it might grow differently, with success defined not by high loan repayment rates but by whether loans actually transform lives. See more.

Microfinance and architecture for the poor?

Tariq Toffa, Cape Town Community Manager

Banking is an age-old industry, but banking with the poor has grown exponentially only over the last two decades into a $70 billion sector with over 200 million clients.

"Microfinance" was originally intended by its Bangladeshi Nobel prize-winning pioneer, Muhammad Yunus, to enable people to earn their way out of poverty by building up small businesses through loans at affordable interest rates. Yet only after three decades, billions of dollars of investment, and the creation of some 10,000 microfinance institutions was the first major study into its effects on poverty published by MIT in 2009. Alarmingly, it found no impact on poverty, with only two percent more new businesses being created. With similar findings in academic studies, such as those by David Roodman and Maren Duvendack, along with whistleblowers decrying exploitation and a spate of Indian debtor suicides, microfinance appears to be in a state of crisis; not a financial one (it remains a highly profitable industry), but an ethical one.

In South Africa, the microfinance sector has grown over the last decade with 41 percent of an estimated 421,000 informal credit unions or savings groups ("stokvels") now in the formal economy. Again, however, much of the loans are not used for growing small enterprises but for consumption. Set against the contentious reality of the global microfinance industry, and a local context of high household debt, rising cost of living, and high unemployment, South Africans appear to need better ways to build and maximize savings more than they need new ways to incur debt. South African microfinance—which looks set to continue its growth—must therefore consider how it might grow differently, with success defined not by high loan repayment rates but by whether loans actually transform lives.

One approach is to explore different financial models. The pooling of resources, for example, is the model adopted by the Cape Town-based housing microfinance organization called The Kuyasa Fund, where borrowers combine the loan with a government (RDP) subsidy and their own group savings, to build a formal house or improve an existing house (fig. 1: before and after). Alternatively, another model could explore how different funding sources could be directed toward small incremental projects (house additions, small businesses, etc.), which can be less financially burdensome to poor households while also allowing choice over time.

In another approach, the sector could be more attentive to the context in which impact is desired and link up with other projects and actors. Other City projects, for example, could provide city infrastructure while formal and informal financial institutions and structures can 'clip' onto these catalytic projects. South Africa's NMT networks (pedestrian/cycling routes) currently under construction, for example, which pass through residential areas (fig. 2), should actively be designed to facilitate small, local economic opportunity, resident-led densification, and public realm upgrading. This approach would not expect the poorest and most under-resourced to become savvy entrepreneurs, but actively helps to create the enabling environments which facilitate opportunity.

Organizations like Kuyasa must explore these or other approaches to fulfill the mandate "to pioneer a methodology for finding sustainable solutions to poverty." Generally, more strategic approaches should allow greater opportunities for residents and business owners, while also curbing the "tiger" (as Yunus himself put it) to a moderately-sized sector, and not creating "giant machines for indebting the poor" (as Roodman put it). But still the question remains: can this flawed sector—whose reality has caught up to its image—be salvaged through greater transparency, strict regulation, and strategic focus areas, or is it foolishness to still maintain a belief in a neoliberal market model solving poverty? Close.

Increasing capital through mobile technology

Jakarta, 10 December 2014 — There are still a limited number of non-financial institutions in Indonesia that pay attention to the development of urban micro-enterprises, and most of them only provide capital. However, not only does PT Ruma provide capital, they also provide training for their agents. Can social enterprises like PT Ruma provide assistance to small traders that would be unattainable through formal financial institutions? See more.

Increasing capital through mobile technology

Widya Anggraini, Jakarta Community Manager

The informal economy in Indonesia has three main characteristics: business activity is variable and unorganized in terms of location and working time; product innovation uses minimal technology; and there is a minimal amount of funds available for working capital. The people in the informal sector are usually beggars, peddlers, small shop owners, and street vendors. The informal sector grows rapidly in Jakarta because it's easy to enter without any special skills, unlike the formal economy. Until now, not many formal financial institutions have been able to reach this low-income community. However, PT Ruma has helped thousands of urban micro-enterprise owners to expand their businesses by introducing them to telecommunications technology through the Waralaba Mikro Telepon Desa program and other innovations.

The number of informal sector workers in Jakarta is more than 1.5 million. These small traders, often found on street corners, face the problem of obtaining capital for their businesses. Help for the development of these businesses is also very minimal. The existence of Ruma comes as a breath of fresh air for these small traders. As a social enterprise, PT Ruma is an institution that has a social mission, which is to provide capital, guidance, and training for micro-enterprises so they can have access to financial services and information, empowering their shops and warungs (small roadside stalls) through user-friendly technology.

One important technological feature developed using mobile phones is the fruit of the collaboration between PT Ruma, Grameen Foundation, and Prakarsa Qualcomm's Wireless Reach. The mechanism is to recruit small shop owners who have the potential to be service providers for payment and finances. The recruits then become buying agents for mobile phone packages that contain micro loans. The mobile phones then function as a platform to provide application services and additional services in order to increase their income. The agents are trained on how to request phone card credits from the Ruma server and how to sell mobile phone credits. This is how agents start a phone credit business. The micro-franchises can now immediately sell airtime, or phone credits, to their communities, using only their phones as a transaction tool.

After being in operation for two years, Ruma has more than 8,300 agents around Jakarta. This is an important achievement; their members are mostly warung woman-owners who use the phone credit business as a side job. With this credit business on the side, their income increase can be used to add to their main businesses. According to Ruma, the extra earnings can reach up to Rp. 20,000 – 40,000 ($1.62 – $3.24 USD) daily. Though this is a small amount, it makes a difference in helping these small business owners.

It is quite a challenge for Ruma to scale up their venture. They have been diversifying their products, such as allowing agents to provide saving deposit services for those who are unable to access conventional banks. Other mobile phone-based product innovations have also been developed. However, there have also been constraints in finding investors for social enterprises. There is a limited number of local and national companies in Indonesia that are interested in supporting social enterprises, as they are considered less profitable than traditional businesses. Nevertheless, social enterprises like Ruma have helped improve the earnings of urban low-income communities that have not had the option to seek help or loans from formal financial institutions. Close.

Mobile money for financial inclusion?

Lilongwe, 9 December 2014 — Recently-launched mobile money services promote themselves as offering secure and affordable financial transactions for Malawians, of whom only around a quarter are formally banked. Yet among Lilongwe's unbanked poor, uptake has been limited due shortcomings in the services offered. See more.

Mobile money for financial inclusion?

Nora Lindstrom, Lilongwe Community Manager

Leapfrogging technologies is nothing new in developing countries, with novel opportunities offered by the mobile phone epitomising the phenomenon. In Malawi, where only around a quarter of the population is estimated to be formally banked, residents have over the past couple of years gained access to mobile money services, even on the most basic Nokia brick.

Theoretically, mobile money services offer many opportunities for the unbanked urban poor. The new services enable urban dwellers to handle money more securely, pay for goods and services, as well as send money home to relatives in the countryside. When Airtel Money launched in 2012 as the first mobile money service in the country, the then Minister of Finance Ken Lipenga hailed it as a way for both banked and unbanked customers to "enjoy the benefits of affordable, fast, and secure financial transactions."

When Lilongwe resident Yusuf Meya earlier this year wanted to send money to his sick mother in the countryside, he chose to send it through the Post Office, paying 10 percent of the sum wired in transfer fees. This wasn't a decision he made due to ignorance of mobile money or lack of access to a mobile phone. He simply had no other choice: in his mother's village there are no reliable mobile money agents from which his mother could claim the cash. "I needed to make sure that my mother received the money the same day," Meya says. "If I had used mobile money, it might have taken her three days to get access to the cash, because the agent might not have had the money immediately."

This problem, known as agent illiquidity, is a recognised challenge in Malawi. So while mobile money could offer an inexpensive means for higher earning urban residents to send money to their rural relatives, lack of extensive agent networks with liquidity is holding them back.

Again, however, the services offered fail to provide widespread benefits to the urban poor; few of the urban poor have direct utility connections, and even fewer are likely to fork out 4000 Malawi kwacha (around US$10) for a Debonair's pizza.

Two years on and mobile money has failed to make major inroads among Malawians. Even the urban poor have been slow on the uptake, despite having significantly better access to mobile money agents with liquidity (as well as access to a higher amount of agents more generally) and more use for the payment options offered compared to their rural counterparts.

The opportunities offered by mobile money however remain. Ongoing advertising campaigns by both Airtel and TNM highlighting the financial ease and security of mobile money combined with improvements in accessibility, such as Airtel's recently announced partnership with Total petrol stations, could over the next few years lead to wider use. Still, in a traditionally cash-reliant society convincing people to go mobile with their money is going to remain a challenge. Close.

Reaching India's poorest five percent

Bangalore, 8 December 2014 — Microfinance has seen great success across the developing world, but urban India's poorest continually remain forgotten. Bangalore-based Parinaam is one of the few organizations helping the ultra-poor gain access to financial services. Their model is an unusual break from the standard female-head-focused lending. See more.

Reaching India's poorest five percent

Carlin Carr, Bangalore Community Manager

Microfinance has been a game-changer in improving the lives of millions of poor people across India. Small loans are primarily given to women to catalyze upgrades to housing, access to basic services, or better employment. Many microlending institutions across the developing world boast nearly 100 percent repayment. While many of the world's "unbanked" have gained financial access, one group continually remains outside the system — the poorest of the poor. These poor are not just in India's rural hinterlands. Many urban ultra-poor remain in dire need of financial services before they can truly improve their situation.

Bangalore-based Parinaam is working to address this gaping need. Founded by Elaine Ghosh in 2006, the organization works in eight slums, which house the city's most needy. They are the working poor — rickshaw drivers, street cleaners, vegetable sellers — who not only lack access to formal banking systems, but lack access to most other services as well. These extreme conditions make them vulnerable to malnutrition, disease, and very casual work conditions. They live on the edge with little opportunity to save, and the programs that have worked for other poor communities have hardly been experimented with among this population. "Despite the success of microfinance and other development initiatives, the bottom 5% of the poor are continually excluded," says Parinaam. The organization is working to change this.

In collaboration with Ujjivan Financial Services, Parinaam is pioneering a model outside the norm. "We realized that to be truly effective in treating poverty, the work must start from the bottom up with the poorest of the poor," says the organization. Parinaam's Urban Ultra Poor Program works to tackle generational poverty and familial poverty, rather than the "isolated female support" promoted by most microfinance initiatives. Over a 12-month period, families receive "intense" assistance, education, and monitoring in four target areas, including financial literacy. The others are livelihood development, healthcare support, and education.

Elaine Ghosh is passionate about this basket-of-services approach to tackling extreme poverty. In an interview last year, she said, "If you want to make a dent in poverty one has to take a multidimensional approach. You have to give them healthcare, you have to give them access to vocational training, you have to help the kids get into decent schools, and stay there, so that the parents won't pull them out and send them to work." At the core of all these needs is the ability for families to save and invest in these improvement areas.

Parinaam helps these communities gain access to bank accounts and, just as importantly, educates them in saving, budgeting, and investing in appropriate plans to better their future circumstances. Parinaam has already reached 67,000 slum dwellers with its financial literacy program, and according to Ghosh, the program has seen great success: "We have families that we found doing hard labor, and at the end of the program they can access microfinance, they have bank accounts, they are sending their kids to amazing schools. The change we've seen in these women will not let us stop." Close.

Banking the unbanked and the underbanked

Lagos, 5 December 2014 — Lagos' residents become unbanked due to lack of information or access and onerous time requirements. Inclusion efforts have led to the launch of various initiatives; this month, we focus on a groundbreaking one in Lagos: a banking system using nontraditional tools and methods to extend services to the urban poor in slums and inaccessible areas of the city. See more.

Banking the unbanked and the underbanked

Olatawura Ladipo-Ajayi, Lagos Community Manager

Financial inclusion has become the focus of many nations in the Global South, and has become the biggest buzzword in the financial sector of many countries, including Nigeria. The concept of extending financial services and access to the wide range of citizens, especially the urban poor, has become a focal point in the banking sector of Lagos. It is not important just for having an inclusive system, but also for access to credits and funding to start enterprises which the urban poor often desperately need. A recent report shows that only nine percent of MSMEs surveyed in the nation received start-up capital through commercial loans.

Most efforts at including the poor revolve around policies requiring commercial banking institutions to revamp their account opening policies and expand their reach. These requests have been met with various responses from the different commercial banks including increased branch openings, 'no minimum balance' account options, mobile money programs, and point of sale terminals (PoS) to mention a few. While these efforts contribute to inclusion, the major barriers to inclusion — lengthy time requirements for both account opening/maintenance and credit approval — are not thoroughly addressed. However, one bank stands out with its agent banking program: the Sterling Bank.

In an effort to overcome the many barriers to financial inclusion, the Sterling Bank rolled out in December 2013 an agent banking program in the Lagos slum areas of Makoko and Itun Agan, amongst other locations around Nigeria. The idea of the program is to have community agents who reside and work in these areas to provide financial services as bank agents to the immediate community. The program also includes modifications to traditional banking requirements and technology by using non-traditional banking retail outlets that rely on technologies such as PoS machines recognizing fingerprints, mobile phones, and a biometric and voice-enabled device. Other features include zero opening account balance and no daily minimum account balance provisions. The program, through these modifications, reaches the unbanked poor in slums areas: it includes the illiterate unbanked population through its voice recognition and fingerprinting system, which also serves to increase security and trust. There are currently 60 agents serving various areas of Lagos city in areas ranging from Ajegunle to Akowonjo to serve the lower-income, excluded, and poor city residents.

While programs like this do not confront the issue of access to credit, they do effectively target a major issue of financial inclusion: access to financial services. The ability to be included in the formal sector, while not guaranteeing credit access, is definitely a step in the right direction for the urban poor. Being part of the formal financial system introduces various financial services and options to those previously excluded. It provides opportunities for saving with minimal requirements, and creates the initial banking relationship vital for credit access. The inclusion effort for those at the base of the pyramid in Lagos has been evolving, starting from multiple branches, to mobile money. The groundbreaking Sterling Bank effort is another chapter in this rapid evolution. The hope is that the next stage of innovation for inclusion will involve practical solutions to credit access. Close.

Nairobi, 4 December 2014 — An individual's propensity to save is directly linked to their ability to begin the ascent out of poverty. Increased savings and micro-credit opportunities, alongside financial literacy training, are key potential growth opportunities for Kenya. In Nairobi a number of groups are developing innovative capacity development approaches to increase effective utilization of available financial products. See more.

Hilary Nicole Zainab Ervin, Nairobi Community Manager

According to the FinAccess 2013 Survey, utilization of formal banking services in Kenya by adults has grown from 41 percent in 2009 to over 66 percent by 2013. Over the same period, the percentage of individuals using non-prudential [mobile] banking options as their primary monetary transaction method has increased significantly as well, from 30 percent to more than 63 percent respectively. In addition, rates of usage of informal lending methods and those excluded from banking services entirely have steadily declined.

Safaricom and Vodaphone revolutionized banking for Kenyans in 2007 with the introduction of M-Pesa. For the first time, highly impoverished individuals who were previously unable to access formal banking, were able to deposit money to an account. The services available to M-Pesa users took another leap forward in 2012 with the introduction of M-Shwari.

M-Shwari allows individuals to make deposits via their mobile phone to a savings account that generates interest at a rate of five percent a year. The service provides a flat interest rate of 7.5 percent on 30-day loans up to 20,000Ksh ($240 USD) that requires no collateral, has no transaction fees, and provides instant loan processing. A recipient's loan amount is dependent on a number of factors; the amount saved and the regularity of deposits to the service rank highly as advantages in obtaining a favorable loan determination.

In 2013, under the Ministry of Devolution and Planning, President Uhuru Kenyatta instituted the Uwezo Fund as a key Social Pillar of Kenya's Vision 2030. Such programs are critical to empowering some of the most vulnerable in Nairobi. However as Wanjiku Muhia, the MP from Nyandarua, points out, it is critical to train women in acquiring entrepreneurial skill so that recipients are equipped with the knowledge to make wise investment choices and not simply dig deeper into poverty.

Organization such as Faidisha SACCO, CAP Youth Empowerment Institute, and Shining Hope for Communities, operate to fill this gap. Faidisha provides their members with opportunities to expand small and micro businesses through the utilization of Kiva loans. Founded in 2012, Faidisha Kiva has registered 160 members who are saving between 20 to 50 shillings ($0.22 to $.55 USD) a day. They have conducted financial literacy training with over 50 members and provided larger business loans ranging from 3,000ksh to 30,000ksh ($33 to $332 USD) to 10 of their members while maintaining a repayment rate of 95 percent.

CAP Youth Empowerment Institute, a nation-wide network of 11 training centers, approaches financial literacy among youths from a capacity building perspective. Providing financial education alongside a diverse package of micro-enterprise and small business development trainings, they target their curriculum regionally to meet real economic demands. The results have been impressive, for example the Buru Buru Center in Nairobi have enrolled 883 youths in nine batches, providing training to 774 to date with another 98 undergoing the program currently. Of those, 511 youths have obtained employment and 49 entrepreneurs are operating small businesses.

Isaiah Opiyo, a financial literacy trainer, highlights the importance of understanding one's members in the design and implementation of financial literacy training initiatives. The organization Shining Hope for Communities (SHOFCO) addresses this through a holistic approach to micro-enterprise, comprehensive household education and grassroots based development infrastructure decision making. They target Kiberia and Mathare, two of Nairobi's large informal settlements, to achieve broad-based development from a gender equity approach; ensuring that all members are included in the services provided at the household and community-levels. If the past is any indicator, these innovative solutions, and other like it, will continue to evolve to meet the increased citizen demand of Nairobi's evolving financial services sector. Close.

Financial access to housing: the Nasser Social Bank

Cairo, 3 December 2014 — The system of tools to finance housing in Egypt is broken, both for the beneficiaries and for the credit institutions. Targeting the poor, Nasser Social Bank in Egypt made the process easier. See more.

Since the January 25 revolution, strategies for tackling the housing crisis have been hotly debated. The General Organization for Physical Planning stresses that the issue of informal housing has been caused by economic and social issues and that the best remedy is containment of the growing informal settlements while building new formal housing to meet the escalating demand. The government also has a controversial "Cairo 2050" plan to knock down the slums and build on the land.

One organization in particular has sought to combine both approaches by recognizing the needs of those living in informal communities along with a viable economic approach. Nasser Social Bank (NSB) was established in 1971 with the aim of increasing social equality in Egypt. Hence, the bank gives loans to low-income individuals and those in need. During 2012, the bank provided financing for approximately 85,311 low-income individuals with roughly EGP 1.9 billion ($265,000,000 USD) to help them purchase suitable homes. The figures for 2013-2014 show the bank providing EGP 2.2 billion ($307,000,000 USD) to 81,500 beneficiaries.

The bank works to alleviate the tenants' and home owners' financial burden by providing funds to refurbish their units, through funding "advances" or full purchase payments for small units. These financing possibilities are considered "loans" that are paid back by the beneficiary on a "long-term" basis, meaning 60 months or more in some cases. The loans can reach 50,000 Egyptian Pounds ($7,000 USD) per person. The loan provision process is 'facilitated' in that the client must be working in a governmental or private organization so that they can transfer their salary to the bank in order to deduct the loan installment each month. It is worth noting that there is no interest whatsoever on these loans, as the bank is 'social' and based on principles of solidarity.

The NSB's model is unique as it is authorised by law to receive Zakat and has a mandate to distribute the funds received in a manner that improves the livelihood of the poor. In 2012, the bank gave a total of EGP 210.4 million ($3 million USD) in Zakat funds to 2,546,485 beneficiaries.

In short, NSB helps alleviate Cairo's housing problem by providing small funds and micro-housing credits for Egyptians in need of a decent home, presenting a great example of housing finance instruments for the poor. Close.

Financial Inclusion = Participation + Access

Delhi, 2 December 2014 — There are many pieces to the financial inclusion puzzle. This article discusses financial education and relevant awareness as one of the critical pieces. Case studies from Delhi including Sanchayan and SEWA pinpoint enabling participation through literacy as the roadmap that goes beyond access to ensure optimized use of financial tools. See more.

Financial Inclusion = Participation + Access

Priyanka Jain, Delhi Community Manager

It's expensive to be poor, a famous phrase of Barbara Ehrenreich's book Nickel and Dimed: On (Not) Getting By in America, sums up quite well the demerits of not having access to banking services. It tells the story of many unbanked Americans but also reflect the life of millions of poor families across the globe. These families live on the edge of destitution and spend high percentage of their income replacing traditional banking services, usually with quick fixes that charge usurious rates. On the one hand, Delhi has made considerable progress increasing access through microfinance. Yet, the road to financial inclusion has many stones unturned.

Among Delhi's poor, financial literacy skills are still lacking. For example, large numbers of boys and girls who run away from their homes in villages come to the city for survival and don't have any support mechanisms. They work in the informal sector to earn minimal wage and usually spend it on unhealthy items such as tobacco, alcohol, and drugs. One particular NGO, Sanchayan Society, is dedicated to disseminating financial literacy among youth, urban migrants, and the rural population. It conducts sessions on the importance of saving money for their future, the basics of banking, how to obtain financial identity like PAN cards, and developing entrepreneurship skills. The workshops are designed in a practical manner, comprised of games and activities such that these underprivileged youth can understand money and improve their "financial happiness." There are other initiatives being undertaken by the Reserve Bank of India and the Securities and Exchange Board of India. In addition, many institutions — including Swadhaar FinAccess, Jana Urban Foundation, Samhita Community Development Services, the Parinaam Foundation and Ujjivan Financial Services — are working on pilot models of financial sustainability to address this gap.

Besides familiarity with financial tools, products, and programs — old and new — institutions need to have the flexibility to tailor banking products with the client's cash flows and incomes as well as their needs. To deliver this, SEWA Delhi has been partnering with the Mission Convergence department of the Government of Delhi since 2011. Financial inclusion is one of the focus areas of Mission Convergence, with the aim of ensuring this for 100,000 women, spread across all districts of Delhi, by 2016. The plan is to organize financial literacy training sessions for women in order to empower them to make sound financial decisions and to strengthen the operations and financial systems of the cooperative to ensure better service delivery and risk management. In 2012, operations had been extended to 15 areas, with 6,000 members; 7,500 women have been reached through the financial literacy trainings.

In addition, Mahila SEWA Urban Cooperative Thrift and Credit Society provide doorstep services from Bank Sathis who go door-to-door or to the work areas in order to collect savings, loans, and interest due. Depending on their cash flows and incomes, members can choose from a bouquet of savings products. And the interest charged on loans is just 1.5 percent, as against 5 to 10 percent being charged by exploitative moneylenders.

There are many pieces to the financial inclusion puzzle. Relevant awareness, financial education, and user-centric products are critical pieces that will make people favor banking services over informal sources like money lenders and prevent the accounts from turning dormant within months after being opened. Close.

New institutions to foster financial inclusion

Bogotá, 1 December 2014 — Colombia lags behind the other Latin American countries in terms of financial inclusion. In order to reverse this trend, a law has just been enacted that allows for the creation of financial institutions that overcome the main barriers to banking: high fees, mistrust, and bureaucratic difficulties to the opening of accounts. See more.

New institutions to foster financial inclusion

Jorge Bela, Bogotá Community Manager

Colombia is not among the leading Latin American countries in terms of financial inclusion. World Bank data indicates that only 30 percent of the population has a savings account (ASOBANC claims that 63 percent of the population has had some sort of financial product at one point, but only 41 percent have an active savings account). Although Colombia leads in terms of some products, such as mobile banking, the situation is not as good as it could be, considering that it is the fastest-growing Latin American economy. Several reasons explain this: lack of sufficient funds in most families, low trust in the financial sector, huge bureaucratic barriers to opening an account — a consequence of strict restrictions imposed by the fight on money laundering — high fees (Colombia ranks 15th of 25 Latin American countries on cost of financial products), and in most of the country, lack of nearby offices. In Bogota, the wealthiest city in Colombia, low trust in the system, bureaucratic barriers, and high fees are the main obstacles to financial inclusion.

The Colombian President, Juan Manuel Santos, has just signed a law that is intended to significantly improve financial inclusion in the country. Known as the Ley de Inclusión Fianciera (Financial Inclusion Law), it is not as ambitious as its name could indicate, but it takes significant steps. Its most important provision is the creation of a new type of financial institution, known as Sociedades Especializadas en Depósitos y Pagos Electónicos (SDP, roughly translated as Corporations Specialized in Deposits and Electronic Payments). The SDPs will be able to accept deposits, up to three times the minimum wage, but will not be authorized to make loans. Electronic payments, wire transfers, and interbank transfers will be the main services they will offer to their customers. They will be able to issue debit cards, but not credit cards. These new institutions will have far lower capital requirements than traditional banks, only the equivalent of $2.7 million USD, which will open the market to a far wider number of potential investors. They will fall under the supervision of the same agencies that supervise the traditional banks, and deposits will be guaranteed by the Fondo de Garantías de Instituciones Financieras. To open an account, customers will be required to provide only their name, national ID number, and the place and date where it was issued. One major advantage for customers is that they will be exempt from the four per mille tax that is now charged in normal financial transactions.

Up to now, the huge wire transfer market has been dominated by companies created under postal service regulation. In 2013, the total volume came close to $5 billion USD. These postal entities cannot accept deposits, are not supervised by regular financial agencies, and charge fees that are considered by many to be excessive. The SDP will be able to compete against them by offering additional services, such as payments and debit cards, in addition to being able to offer far lower fees for wire transfers. These advantages are particularly relevant in Bogotá because they address the main barriers that limit financial inclusion in the largest and most affluent city in the country.

According to some estimates, up to 20 million Colombians could benefit from the creation of these SDPs. Unlike traditional postal wire transfer services, the new institutions allow for the creation of a credit history, which would allow future access to full banking services, including credit. Even if the potential is significant, María Mercedes Cuellar, president of ASOBANC, raises some questions about the future success of the SDPs: "It is too soon to know how effective, or what actual shape they will take with time." Close.

Priyanka, it is a great article. Actually introducing financial sustainability using an educational approach as you mentioned on the experience of some organizations including Sanchayan Society is really very interesting and inspiring. Education has been always proved to be a very effective way and influential method to create a change and an impact for the whole socity. I wonder, how such organizations as Sanchayan Society found the youth's encouragement and join percentage? Is it easy to get such unprivileged youth interested in those educational initiatives to make the awareness and education as one of their priorities? Also, how the government encourages those NGOs who are working to promote financial "awareness"?
Great article!!!

Thanks for your kind comment, Shaima. Sanchayan has active tie ups with private and government schools as well as NGOs. The "FUN" Financial Literacy Program comprises of games, role plays, stories and videos to make the workshop highly interactive and participative. Its subdivided into two programs. Paid workshops for students and teachers of private schools. The focus is to not cover details but ignite young minds to learn and increase their knowledge. The revenue generated from these workshops is used to provide free workshops at government schools. For those who are not part of formal education system, they reach through orphanages, NGOs and institutions across the country. In both cases, the workshops are longer than one for private schools with focus on the basics of savings, budgeting, banking etc. I am not sure of their current status, but they have been supported by the Project Financial Literacy (Reserve Bank of India) and Securities and Exchange Board of India as well as Organization for Economic Cooperation and Development.

The woes of the poor on the financial inclusion matrix is more than words can describe. In the city space of Accra, the poor is the least considered in the service of banking. Banking services are mostly geared towards the elites of the city with captions such as Royal Banking, Special current account and Premium bankers. All the demands of these services are and will never be met by the poor. Where on earth can the poor get collateral to support loan application to have access to credit to expand business? Who in the bank can escort the poor beyond the counter to be attended to when all he/she has is a little savings which is too insignificant to be noticed. Banks in the city space must come out with strategies to support the growth and productivity of the marginalised poor in the city.

It's interesting to read the reasons Nora presents for mobile banking not being taken up as widely as expected in Lilongwe. It's an obvious stretch to link up mobile payments to fast food chains and other formal institutions that are outside the purview of the urban poor. It does seem to me that there is great potential for mobile banking for this demographic, particularly for the urban-rural transactions, but others usages seem like they could be trickier. For example, Hilary mentions a program in Nairobi where quick, small loans can be granted simply through mobiles. The mobile loans, however, skip key steps that Priyanka and others mention about the need for financial literacy and awareness--perhaps more important than efficiency of a mobile loan. Microfinance succeeded in such a big way because there was not only a group commitment but hands-on weekly check-ins from loan officers who would be sure the recipients were on track. For mobile banking to truly realize its potential among the urban poor, there needs to be a balance between the convenience of the technology and the hands-on services required to ensure that the loans are accessed and used with thoughtful planning.

I couldn't agree more Carlin, financial and technology literacy needs to be an important aspect of programs targeting financial inclusion especially as most efforts often involve some technological innovation/breakthrough. I found it really interesting that majority of the articles touched on mobile money, and some will argue that by the very virtue of technology being involved, the programs are exclusive as know-how, access and affordability of that technology is required. These programs cannot go on without proper education.

Education about financial and technology literacy is also important as it seems it would be key in solving access to credit issues, mobile technology is not leaping in the south, and as service providers are now required to register users (at least in Nigeria), I imagine a form of database linked to cellular registration will inform mobile loan applications in the future. Programs like the mobile investment in Nairobi give hope to effective use of mobile technology, provided all other aspects such as access and know-how are considered.

Hey Carlin, I agree with you completely that increased financial literacy training is critical to individuals seeking micro-credit loans and access to non-traditional credit markets. I think that for some however, access to cooperative credit schemes have declined in importance due to a number of factors. In Kenya for example, the difficulty for highly impoverished urban households may be that such schemes, where they do exist, still crowd out members for numerous reason and/or may not be readily accessible within an individuals economic geography. In such cases, the micro lending mobile scheme developed, such as the one I covered in my article developed by M-Pesa, is one mechanism for short-term emergency lending that still has built in protocol for repayment and savings. Though the threshold appears low, 20Ksh/day, for many individuals this is still a significant saving investment/decision. It is important that the real need for education not be overshadowed by the realities of lack of access due to increased demand for these trainings and realities faced by individuals living and operating across informal settlements. Understanding that opportunity and access continue to be constrained for many provides a justification for innovative mobile lending, especially when built on years of successful experiences with mobile money platforms that the Kenyan market has truly been at the forefront of developing. For some as well the economic cost of attending regular meetings may not be realistic, which opens up the possibility for eLearning opportunities which might be better suited towards a highly mobile market such as Kenya while not as ideal for another setting. Critical to obtaining sustainable human development is adequate accounting for the realities of local context and unique barriers faced by different population segments.

The articles this month highlight how complex the issue of finance is. In my article I mention how, at a minimum, mobile money in Malawi can give the poor an opportunity to store money safely (on their mobile money account vs under their mattress), Tariq talks about the importance to promote savings over loans in South Africa, Hilary discusses new ways of accessing loans on your phone in Kenya, Priyanka talks about financial literacy skills, and Wura describes an expansion of formal financial services to the poor. What seems to be missing to me are examples of instutitions/organisations doing all of the above. Sure, piecemeal and step-by-step approaches may bring us closer to financial inclusion of the urban poor, but there is a need for all aspects of finance to be a reached in order for the poor to truly benefit from financial inclusion. After all, that’s what financial inclusion really means, to be able to save, borrow, invest, keep your funds securely and make secure transactions. So far, it seems we're achieving either one or the other.

Jorge, I really enjoyed your article this week on the importance of considering and including gender in financial institutions development of targeted poverty alleviation programming. It is especially encouraging to read of organizations such as the Banco WWB that began as relatively radical approaches over three decades ago, to address development and economic security for low-income women and have not only sustained over the years but continued to achieve impactful programming and outcomes for women. As the link between gender and development continues to be highlighted by multi-lateral institutions, development agencies and community-based organizations it is important that successful initiatives continue to be highlighted in forums like this one. Thanks for this article!

Hi Carlin, i have similar question as aura has raised and i think you presented an interesting case where the government acknowledged the youth and decided to capacitate them. I am also wondering the political process behind this policy and maybe further question is about what to do with youth that have been provided with skills? are they directly working or what kind of policy follows? because indonesia has similar problem in demographic surplus and there has been little effort to empower youth